Punjab National Bank disclosed that a fraud which has gone on undetected for seven years has cost it $1.8 billion. Photo: Abhijit Bhatlekar/Mint

India faces the risk of a mini rerun of 2013. On the face of it, this is an absurd statement. The current account deficit is still moderate, though some hefty upward revisions are being made. The inflation rate is half of what it was then. The fiscal deficit of the Union government is not running amok. All of these are true. Yet, the risk of a significant correction in the Indian rupee and in Indian assets might be on the cards, again not because of a rising current account deficit but because of a rising credibility deficit.

Let us start with the trade data for January released last week. India’s trade balance in the first 10 months of the fiscal year 2017-18 amounted to $84.5 billion. It was $59.4 billion for the same period in 2016-17. If one included services for which data were available only up to December 2017, the trade deficit is at $80 billion, roughly double of what it was in the previous year. Export growth has picked up but the recovery in export growth is sluggish thanks to various factors. Some of it is structural in nature.

In recent weeks, India’s credibility has taken a series of knocks. The government diluted its commitment to fiscal prudence. Sure, the government has not gone splurging. Indeed, even including the borrowing from the small savings funds, total borrowings by the National Democratic Alliance (NDA) government budgeted for 2018-19 are, if anything, slightly lower than the government borrowing in 2013-14. The Union government’s market borrowing had gone up 10 times between March 2005 and March 2014 (five times from March 2004). So, a fiscal slippage simply triggers bad memories. Together with states’ deficits, the fiscal deficit is more than 6% of gross domestic product (GDP). Officially, we only have budget estimates of state governments’ combined fiscal deficit for 2016-17. It is 3% of GDP. The Union government’s fiscal deficit for 2016-17 was 3.5% of GDP. The bond market was willing to lend to the government at 6.4% per annum for 10 years last July. Now, it demands 7.7%.

The prime minister spoke well about the need for an open trade regime at Davos. Then, the budget saw the government raising import duties on some items. Further, import duty on pulses has been raised as well. Reportedly, the government has leaned on graphite electrode manufacturers to reduce prices for domestic steel producers. They are benefiting from the surge in global prices as China shut down capacity. Only recently has the government abolished the minimum export prices for onions. A few months ago, the customs department had imposed import duty on solar panels, labelling them batteries. Now, a proposal to impose safeguards duty of up to 70% on solar panel imports from China is awaiting a decision. All of these may be justified or not. That is not the point. The government’s frequent tinkering with market prices undermines predictability and raises uncertainty for buyers and sellers.

On top of these, India’s commercial sector (private or public) credibility too has been hurt badly. The State Bank of India restated its bad debt pile when it announced its third-quarter result. Punjab National Bank disclosed that a fraud which has gone on undetected for seven years has cost it $1.8 billion. Other banks too have discovered frauds now. The Hindu BusinessLine reported that India’s importers are refusing to take delivery of pulses in Indian ports because domestic prices have crashed. These are imported on a “cash against delivery” basis. Importers are refusing to accept the import documents. This is hugely embarrassing. Bad news spreads faster than good news and if contracts signed with Indian importers run the risk of being breached, few will sign. It will have a knock-on effect on exports too. Ramesh Venkataraman’s article, “An Unethical Place: Waning Ethics In India’s Private Sector”, in The Indian Express (10 February 2018) offered a rather sobering and depressing read on the trust and credibility that India’s private sector enjoys around the world.

Even as all these were unfolding, the Bombay Stock Exchange, the National Stock Exchange and the Metropolitan Stock Exchange of India issued a joint statement that they would stop providing live prices to other exchanges. It was a rational response to a competitive threat from the Singapore Stock Exchange that it would launch a product that would compete with their core products. Stock exchanges around the world draw a line on their core products being offered offshore. But the implied threat to stop price feeds to index providers such as Morgan Stanley Capital International drew a strong reaction. They said that they might be forced to reconsider India’s weight in the emerging markets index.

On another occasion, India may have the chance to call its bluff but in the light of the above, the timing may not be fortuitous for India. The government has budgeted for Rs80,000 crore from disinvestment. If the stock market turns out to be a terrible underperformer, then the plan will go awry, with knock-on effects on the currency and bond prices.

A global asset price crash might bring the crude price down and save India the blushes. Who knows? Further, in contrast to 2013 when the “Fragile Five” featured emerging economies, including India, the new “Fragile Five” nations could be Canada, Australia, New Zealand, Norway and Sweden, with their housing bubbles and large household debts.

All told, the risk of a mini replay of 2013 exists. Warding off risks requires accepting their possibility, to begin with.

V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com.Read Anantha’s Mint columns at www.livemint.com/baretalk